August’s back-to-school winners

Commentary: Some smart picks for the dog days

By

JimLowell

Editor of The ETF Trader

Editor’s note: With the Olympic Games in full swing, Trading Strategies awards gold medals for some terrific picks over the last year. In October, Jim Lowell said State Street’s DIAMONDS
DIA, -0.30%
should sparkle more than gold. On Dec. 1, DIA closed at $120.13. It went straight up through May to a $133.14 high, making for a great call. Let’s take a look at what Lowell likes this month.

NEW YORK (MarketWatch) — I don’t have to look at my charts to tell you that August is a month that’s best left to the beach and tides; fishing for gains in the marketplace is possible, but soaking up rays is a lot easier said and done.

Doug Couden, director of equities at Baker Avenue Asset Management, is
defensively positioned in the stock market, but not in traditional
consumer-staples or health-care shares.

This August, with so many things having gone so wrong that Europe may be beyond the point of no returns, and make a zero sum gain here at home look downright sunny, the markets could be prone to melting up — yes, I said up.

Now, all the experts with their fancy titles and trenchant sounding forecasts will be skewed toward what can melt down. And they’re not wrong; that’s the skew, at least as I see it. But, with so much bad news comes the increased probability that belief in a bottom may price in a rally off of it, if for no other reason than that human nature likes to assume things that aren’t getting any worse, won’t.

They will, of course. But, not necessarily in August. True, my seasonality charts tell me that Augusts past haven’t been barnburners, but aside from a few haymakers, making some hay while the sun shines shouldn’t be blithely dismissed. Nor should the odds of seeing gains wither on the vine. Perhaps that’s why value stocks tend to have the upper hand across the large, mid, and small capitalization ranges. Emerging markets have fared less well; the riskier the asset and the class the more vulnerable to coming a cropper rather than coming to crops.

My seasonal sector grid tells the same tale. Consumer staples fare better than technology, gold better than oil, bonds better than cash. But, this doesn’t mean that slavish adherence to charts will set a better course than some good old-fashioned gunk holing — you can look that up on Google without fear of blushing. It does suggest to me that paying attention to the charts before you go poking around the jagged edges makes considerable sense.

Despite the third consecutive monthly decline in retail spending, despite the July downgrade of Mastercard
MA, -1.03%
and Visa
V, -1.36%
based on concerns of not merely valuation (they’d had a nice run) but weakening consumer spending, and despite the price inflation of food stuffs, I like consumer staples in the form of Fidelity’s no load Select Retailing
FSRPX, +0.51%
sector fund combined with the Consumer Discretionary Select SPDR
XLY, +0.31%
ETF.

The other side of that coin is less spending on back-to-school items than gauged in the price potential I have in mind. Fear is still being soaked up by the worried sponge rather than being wrung from it. Gold has been a go to coin of fear’s realm, but I continue to view that trade as broken both on fundamentals and momentum. Bonds, on the other hand, find so few professional admirers these days that I think they will yield a reasonable defense if things go south.

No need to be fancy. The iShares Barclays Aggregate Bond
AGG, +0.39%
ETF will do the trick; weighted average maturity is 6.33 years and the effective duration is 4.37 years — positioned mainly in bonds that won’t go bump in the night and yielding 1.78% (SEC 30 Day), 2.48% (12-month yield). But I’d also go contrarian and combine this shorter duration broad basket with the iShares Barclays 20+ Year Treasury
TLT, +0.74%
ETF. If fear storms the castle, this will catapult that fear right back where it came from.

Of course, if fear doesn’t rise, and even diminishes, the TLT will catapult gains from you. To counterbalance that possibility, I’ll make another contrarian call on technology.

Despite the forecasts for a weakening third quarter from the likes of IBM and Intel, I think back-to-school technology buying will be meaningfully strong, and that August is where technology stocks stand their best chance of plugging into gains, so long as fear is dispelled. That didn’t happen last August — fear was mounting and it wasn’t until the end for the month that analysts decided to stick their heads out of their cubicle long enough to see long lines forming outside of Apple.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.